GAAR – General Anti Avoidance Rules

Commerce for IAS – GAAR

The stage is set for General Anti Avoidance Rules or GAAR to be effective in India, starting April 1, 2017. ‘GAAR’ is being increasingly adopted in tax laws internationally to target unacceptable tax avoidance practices.

Let us decode GAAR in the vintage Q & A style.

Q1 What is GAAR?

In order to understand GAAR, it is important to first understand the terms “Tax Avoidance” and “Tax evasion”. In common parlance, Tax Avoidance is the legal utilization of the regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law. By contrast, Tax Evasion is the general term for efforts to not pay taxes by illegal means.

There is a very thin line difference of legality between “escaping tax liability” and “overcoming tax burden” and there exists a grey area between these two heads and the distinction has become increasingly blurred, in view of varying and often conflicting judicial pronouncements.

General Anti-Avoidance Rule (GAAR) expressly merges the concepts of “tax avoidance” and “tax evasion” thereby making the tax regime stricter and less ambiguous.

Thus, we can say that “GAAR is a set of general rules enacted so as to check the tax avoidance.”

GAAR is an anti-avoidance measure that gives the tax department blanket power to scrutinize transactions structured to deliberately avoid paying tax in India and declare it as ‘impermissible avoidance arrangement’.

GAAR contains provisions to stop misuse of treaties that India has with other countries for tax avoidance. These are rules targeted at businesses that are structured solely for avoiding tax in India, such as routing investment into the country through tax havens. Transactions that fail the GAAR test will be subject to tax.

Q2 Why GAAR is in news?

In all possibility, after all delays and debates, GAAR is likely to be finally implemented in India with effect from April 01, 2017.

GAAR was first introduced by Pranab Mukherjee as finance minister in the budget of 2012, following which there was immense furore among foreign investors in India, leading the government to defer its implementation till April 2015.

When it was finance minister Arun Jaitley’s turn to decide on the fate of GAAR in 2015, he further deferred it to April 2017 to give industry as well as the tax department more time to adjust to this sophisticated tax regime.

Now, the government is unlikely to defer the implementation of General Anti Avoidance Rules (GAAR) from April 2017, despite strong pitches from the industry against it.

Q3 Why do we need GAAR?

The need for a GAAR is usually justified by a concern that the integrity of the tax system of a country needs to be stabilized and strengthened.

Tax avoidance, like tax evasion, seriously undermines the achievements of the public finance objective of collecting revenues in an efficient, equitable and effective manner. Sectors that provide a greater opportunity for tax avoidance tend to cause distortions in the allocation of resources. Since the better-off sections are more endowed to resort to such practices, tax avoidance also leads to cross-subsidization of the rich.

In the past, the response to tax avoidance has been the introduction of legislative amendments to deal with specific instances of tax avoidance. Since the liberalization of the Indian economy, increasingly sophisticated forms of tax avoidance are being adopted by the taxpayers and their advisers.

In view of the above, it is necessary and desirable to introduce a general anti-avoidance rule, which will serve as a deterrent against such practices. This is also consistent with the international trend.

Also, in its recent ruling in the very well-known Vodafone case, the Supreme Court has stated that GAAR is not a new concept in India as the country already has a judicial anti-avoidance history.

Q4 Why so much hue & cry on GAAR?

Experts say that the fear against GAAR is that these rules give powers to authorities that could lead to harassment in the hands of the tax department. This will in turn lead to higher disputes between investors and the taxman.

Following concerns have been raised regarding GAAR:

The Indian GAAR provisions are generically worded, leaving ample scope for subjective interpretation.

GAAR will override the provisions of tax treaties entered into by India with other countries. A section of foreign investors are apprehensive as regards treaty override (which means that the beneficial provisions of the tax treaty do not apply in cases of treaty abuse covered by GAAR).

GAAR also makes a presumption in favour of the tax department that an arrangement is entered into for the tax benefit alone, unless the same is rebutted by the taxpayer. The burden of proof has been shifted on to the taxpayer to establish that obtaining a tax benefit was not the main purpose of the arrangement.

GAAR gives wide discretionary power in the hands of tax authorities. Conferring so much power apprehends the misuse and abuse of powers.

There is a genuine apprehension that in an attempt to deter a limited fraction of tax evaders and illegal tax structures, a huge chunk of bona fide and legally permissible tax structuring would also come under the wide discretionary ambit of GAAR.

GAAR and retrospective changes to tax laws have attracted criticism globally, in the wake of which the government had set up the Shome committee to consult stakeholders, study the provisions of GAAR and make its recommendations for necessary changes in the rules.

Q5 How to smoothen journey towards GAAR?

In view of some serious concerns raised regarding GAAR, it becomes imperatives to look at issues surrounding it so that all concerns raised are addressed in an effective manner.

GAAR should be invoked by tax officials only in rare cases to deal with highly aggressive, egregious and artificial pre-ordained schemes.

Some objectivity and transparency should be induced in the entire GAAR mechanism. Wide discretion given to the tax department should either be curtailed down or proper checks should be imposed.

The underlying principal that GAAR should not go against the interest of bonafide tax payers and commercial transactions needs to be strictly complied with and given effect to.

It should be ensured, through appropriate clarifications, that a payer is not burdened with the consequences of GAAR being invoked on the recipient.

Lastly, it would also be beneficial to study the experiences of other jurisdictions where GAAR has been introduced vis-a-vis its effectiveness in curbing tax evasion and its impact on investment climate.

There can be no objection to the objective of wanting to prevent tax avoidance, but care should be taken to ensure that the attempt to do so does not drive away legitimate business — that we do not throw the baby away with the bathwater. Whatever be the fate of GAAR, given the environment it seems clear however, that we are moving slowly but surely towards more substance-based legitimate tax planning.